Pay expectations have evolved to the point where many in the workforce today prefer paperless pay options over paychecks. Employers, if they haven’t already, can meet this demand by setting up direct deposit for their employees. But before exploring how to make the switch, it helps to understand direct deposit and the benefits it offers.

What is direct deposit?

As it applies to employment, direct deposit is the electronic transfer of net pay from an employer’s financial institution to an employee’s personal bank account. This exchange takes place across a network called the Automated Clearing House (ACH).

How does direct deposit work?

On preset days, the employer’s bank sends direct deposit requests to the ACH, where they are processed and passed on to employees’ financial institutions. The banks then credit the employees’ personal accounts with the sums specified in the direct deposit orders. Simultaneously, an equal amount of funds are debited from the employer’s business account.

What are the benefits of direct deposit?

Direct deposit surpassed printed paychecks as the preferred means of wage payment largely because it’s faster and more secure. But that’s not all. There are many aspects to direct deposit that benefit both employers and employees.

Direct deposit benefits for employees

There was a time when employees worried about being unable to deposit their paycheck because of inconvenient bank hours or inclement weather. With direct deposit, however, those stressors are gone. Some of the features that employees appreciate most about electronic payments include:

  • Speed
    Funds are delivered quickly so there’s minimal wait time and faster access to wages.
  • Security
    Direct deposit eliminates the risk of lost or stolen checks.
  • Convenience
    Trips to the bank or ATM to deposit checks are no longer necessary, saving time.
  • Accuracy
    Electronic records make it easier to fix mistakes or locate missing funds.
  • Flexibility
    Payments can be divided into multiple accounts, such as a checking account and a savings account.

Benefits of direct deposit for employers

Direct deposit is just as beneficial to employers as it is to employees. With electronic payments, businesses may be able to:

  • Prevent fraud
    Lost or stolen checks with business account information on them pose a security threat.
  • Save money
    Because there is no need for postage or printed paper, direct deposit reduces payroll costs.
  • Minimize labor
    HR professionals spend less time processing paycheck paperwork and mailing or distributing paper paychecks.
  • Keep accurate records
    Going paperless simplifies bookkeeping and the ability to view transaction history.

Benefits of direct deposit for small business owners

Direct deposit benefits all employers, but it’s especially valuable to small businesses that may be operating on a tight budget. When employers distribute paychecks, they have little control over when employees deposit or cash them. This can cause a cash shortage if the employees withdraw funds at a time when rent, utilities or other expenses are due. Direct deposit minimizes this problem because it allows employers to regularly schedule the exact time that their account will be debited. In this way, they can better manage their finances and pay both their bills and their people.

Setting up direct deposit for employees – step by step

With a little bit of paperwork and a payroll schedule, businesses can be up and running with direct deposit fairly easily. Here are the basic steps:

  1. Choose a direct deposit provider
    Employers can choose to work with the bank that handles their business bank account or a payroll service provider who has direct deposit capability.
  2. Complete setup paperwork
    Banks usually ask employers to sign the ACH terms and conditions and provide recent financial statements to prove they can cover the transactions. Businesses that work with a payroll provider may have to supply details about their company and a bank account number if they haven’t already.
  3. Gather employee information
    Each employee needs to provide the following information: bank name, account type, account number and routing number. Some states also require employees to sign a consent form before their employer can switch them to direct deposit.
  4. Upload employee data
    If the payroll provider has self-service capability, employees may be able to enter their bank information themselves. Otherwise, the employer will be responsible for getting the financial institution the necessary details. A common way to do this efficiently is by exporting a National Automated Clearinghouse Association (NACHA) file.
  5. Sync direct deposit with a payroll schedule
    Some banks and payroll providers require payroll to be run a certain number of days in advance of payday for direct deposit. Businesses who have already been paying employees need to make sure that their direct deposit schedule will work with their existing payroll calendar or create a new one.
  6. Process payroll
    If everything is set up correctly, employees will automatically receive their wages in their bank account every time payroll is processed. However, those who choose not to enroll in direct deposit will still have to be paid via a printed paycheck or some other method.

What is a NACHA file?

NACHA files are used to send banks the information necessary for electronic transactions, such as bank account numbers and deposit totals.

Other uses for electronic payments

Electronic pay isn’t limited to just payroll. Employers and employees alike rely on it for:

Frequently asked questions about direct deposit

How long does it take to set up direct deposit?

Setting up direct deposit can take anywhere from one day to a few weeks, depending on the provider. This wait period applies every time new employees are added to the system.

How much does it cost to set up direct deposit?

The cost to setup direct deposit generally depends on the bank, the size of the business and the contractual agreement between the two. Some banks may also have monthly service charges or transaction fees. Payroll providers, meanwhile, often include direct deposit as part of their basic service package at no additional expense.

What information do you need for direct deposit?

To set up direct deposit, businesses usually need to provide their employer identification number (EIN), financial statements, a completed application and a voided business check. Employees who want to take advantage of direct deposit may have to supply details about their personal bank account, including their account number and routing number.

This guide is intended to be used as a starting point in analyzing direct deposit and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.